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International Telecommunications Student Papers: Olshanetskaya - California Western
International Telecom Student Papers: Olshanetskaya

Privatization of Wireless Communications in Russia

by Darya Olshanetskaya 






                 1) Analog and TDMA Standards (AMPS, GSM-900/1800 and NMT-450) 7

                2) CDMA 9


        Mobile Service 12

Local Telephony 13

Long Distance and International Toll Service 13

Internet Access Service 13

Competition and Natural Monopoly 14

Tariff Policy 15

Private Regulation and Licensing. Authorities 17

Ministry of Antimonopoly Policy and Enterprise Support (MAP) 19

Equipment Certification 20

Technological policy and national interests of Russia 21

    • Rostelecom 27

    • Svyazinvest 28

    • Regional Services. Current Development 29



 Over the last years Russian wireless communications market faced a rapid and successful growth. The new market economy encouraged the country to develop new ways of expanding services and related infrastructure . Even though Russia is behind some of its former Eastern European allies in adopting these changes, the processes take place with an exceptionally high pace. This is applicable to the area telecommunications as well as to the other related industries, which fuel the services growth.

The key to understanding these processes lay in an analysis of the privatization (demonopolization) process of the telecom industry and wireless (cellular) communication specifically. This paper is dedicated to understanding the latest developments in privatization and deregulation of Russian telecom market . Both successful and negative aspects of privatization process will be considered as well.

 In the context of Russian economy undergoing a transition from the centralized planning and regulation (typical also for many European countries as well), the government has taken a very proactive role by dictating the kinds of technologies and infrastructure development projects to be adopted by the private sector – thereby heavily impacting developing commercial relationships between the service providers and their customers. Many government agencies and specifically the Ministry of Telecommunications has carried out these policies in the name of supporting of import and deployment of the advanced technologies and trying to ensure that foreign vendors and operators supply the latest state-of-the art equipment and contribute to the outdated technology and infrastructure of the public networks. To achieve that, the government has developed and imposed many strict standards for systems, hardware and software components, greatly restricting the free market process of selecting the technologies and services, which fit the market best.

 One should remember that Russia always had a peculiar combination of Western countries’ style and its own economic system. Russian politics, cultural and spiritual values and features always made a significant impact on the country’s economic system. Therefore, the Russia market development features a number of own tendencies, which could not be easily measured and valued by the typical criteria of the economic features of the developed countries.

 Russian telecommunications sector also exhibits very specific business and technology trends. First changes in the telecom industry started at the beginning of 90s. Since then Russia made a significant progress in all aspects of technology, business and regulatory issues. Most of the changes were heavily influenced and inspired by mainly political reasons rather than economical policies, but foreign investment climate improvement quite significantly during this period of time.

 Up until now Russia still suffers from a major economic and political crisis of August 1998, when aggressive Government economic policies led to a deep ruble devaluation and state default on Treasury bonds. This left Russia with much-inflated foreign debt and a severely damaged reputation with foreign investors and creditors.

 In 1999, the Russian economy started to recover slowly, although the process has tendered to be restricted to certain industry sectors. For instance, the financials and banking remained very weak. Nonetheless, driven by booming oil prices, natural resources-based industries and certain domestic manufacturing enjoyed a period of growth.

 During 2000 the Russian economy has become more flat and even experienced a modest growth across multiple sectors. Most Western investors however still had to adapt to the new Russian presidency and associated changes in political and economic climate.

 The Russian telecom infrastructure up until now combines elements of the old and new technologies. Service providers are forced to work with complicated and opaque ownership structures in the rapidly changing and unenforceable regulatory environment heavily influenced by political intrigues. With over 300 licensed fixed and mobile network operators, the market is technically liberalized, but the absence of an independent and credible regulator still makes investments risky and unpredictable.

 Most of foreign investments in the Russian public network to date have exhibited very few results. In early 1990s US West, Deutsche Telekom and France Telecom negotiated at length with the Russian government over the "50x50" project, which was supposed to installed fiber rings between 50 Russian cities. Due to final disagreements, however, the project has never materialized. Similarly, the first attempt to privatize Svyazinvest (the state-controlled holding) in 1995 failed when the potential buyer of the privatized stake, Italian STET holding, and the Russian Government failed to reach a final agreement on payment terms1.

 More successful foreign investments proved to be in the infrastructure for the digital overlay and cellular networks. In early 1990s, US West and British Cable & Wireless were the largest foreign investors in Russian telecommunications. US West formed an investment consortium, the Russian Communication Development Corporation (RTDC). AT&T and Deutsche Telekom, have been also the largest investors in the Russian telecommunications sector.

 Other major foreign direct investors include:

- Golden Telecom, holding stakes in cellular and digital overlay network operators;

- Telenor, owning a stake in Russia’s largest cellular operator, Vympelcom);

- Global One, nationwide data network operator a partnering with Central Telegraph;

- Commercebank and Telia, which own an equity in Telecominvest, a holding company for wireline, cellular, and paging network operators in the Northwest Region of Russia2.

 As a summary, an overall transformation of the Russian society requires a careful and time consuming cultivating of the social values conductive to a strong and healthy political and economic system. These new values and corresponding economic realities need to be fully reflected in the telecommunications industry, so it could serve all Russian citizens in the next century.


 Development of the new market economy required new communications infrastructure as well as changes in many sectors of the country’s economy. Therefore, privatization became one of the important components allowing telecom sector improvement.

 Privatization in telecommunications refers to a process of transferring existing state-run and controlled monopoly enterprises, which provide delivery of the voice, data, and video services to a private sector fostering market competition. The main goal and purpose of privatization is to facilitate private investments into the sector, making it competitive on domestic and/or international markets3.

 Any process of privatization cuts back the role of the government and the government-owned businesses are sold off to the private sector. Such deregulation provides two things: it increased the productivity of the capital invested into the deregulated industries making a favorable impact on the general standard of living; and more importantly, it opens up the markets to the competition, putting downward pressure on prices for goods and services. The opened markets and resulted competition between the enterprises also stimulates investments into the other sectors of the economy4.

 In Russia, the process of privatization has been mostly done as a closed auction-based process of selling shares of the privatized companies. Government agencies typically seek the highest bidder when they sell state-owned enterprises directly to a private company or to a consortium of private investors. However, the objectives and motivations behind issuing the shares of privatized companies, in which the state sells its ownership to the public, are heavily influenced by the politics. In fact, the share prices were often deliberately set below their market value, so general public can reap short-term capital gains if they so desired. Also, the Government split the telecom and postal services of each regional operator into different companies and distributed shares among the employees, management, and the state.5 This stage of privatization did not of course bring required level of investment and the regional operators were allowed at the end to sell the state portion of the shares to private investors. Russia is still does not belong to the European Union and is not part of WTO Agreements regulating foreign investment protection; therefore, there were no incentives to harmonize its regulations and laws with established international practices. The Russian Government also did not have any experience in privatization, so the economical outcome was unpredictable. Because of the lack of openness of the process and very limited economical information, foreign investors very often had to speculate or count on opinions of certain advisors (who were in majority former high-ranked state employees with good connection, but limited market and investment experience) regarding the future of market development and prediction of the earnings, since they did not trust the official information or in many cases there was no reliable data available.

 A period of 1998- 1999, after the August financial crisis, was not the best time for foreign investors in Russia. Even many western countries have scaled back their operations, there has not been a wholesale exodus from the country and that represents the strongest evidence that long-term investment there can withstand the tests of the nation’s emerging political and economic system. The good sign was they were aware that any changes and long-term development would not bring the improvements overnight. Even the current law basis does not allow them to repatriate their profits because of the government policy, and the import regime is still unpredictable (it is even more stable right now than before), foreign investors still have to assume a great risk of their operations at the Russian market.

 Most entrants to the Russian telecom market have to come prepared to pay initially very high and inflated prices and be able to change their business strategy very dynamically to follow rapidly shifting political environment. Perhaps, most importantly, a well-connected local partner, favorably regarded by the local government is an absolute must for any foreign investors who wants to succeed in a Russian telecom venture6.


In most of the Eastern and Central Europe mobile services have begun to penetrate the mass market a decade ago. However, in Russia, only recently mobile services spread to reach wider population outside of major economical and political centers. Price competition was not substantial until August 1998. In many areas, due to a lack of operators’ income and no competition, prices for the services reached very high levels. The number of cellular subscribers in Russia increased fairly well between 1993 and 1999 (from 40,000 to 1,25 million), while CAGR grew in 77%. St. Petersburg and surrounding region is the second largest mobile market after Moscow. However, St. Petersburg has not fared as well as Moscow in attracting foreign investment and improving its infrastructure since the privatization process in telecom has just started.

 In other parts of Russia, however, mobile operators were less successful so far. Many of the provincial networks still have too few subscribers to support further investments. Furthermore, due to the large gaps between the incomes of the rich and average Russians, expanding the user base required a major drop in tariffs in order to become affordable to a larger consumer base.

 1) Analog and TDMA Standards (AMPS, GSM-900/1800 and NMT-450).

Russian regulators selected three standards: AMPS, GSM-900/ 1800 and NMT-450, to balance compatibility with North American and European systems. As in many countries, AMPS was designated as a nation-wide basic standard, while others were defined as regional standards. This caused national NMT and GSM operators some difficulties, as they had to negotiate roaming agreements with local operators.

 To maintain a control for the spectrum, as well as development of the network, and protect the selected operators, for some time a decision was made to license only one operator for each region. This, in fact, has hindered cellular growth. For example, Moscow and St. Petersburg had only one GSM operator for several years - the MTS Company. Thus, there was no competition for several years in the two main markets, while the regional market has proved too small to sustain three systems together . It was expected that the number of cellular operators would decrease due to consolidation, but most of the operators, licensed for GSM-1800 had yet to begin commercial service by the end of 1999.

 Initially, cellular licenses were issued as a result of an open auction for a period of 5 to 15 years. In spite of the fact that AMPS is a national standard, regional regulatory authorities have also had a say in the issuing of licenses for the operators . Until recently, operators of wireless networks needed an additional approval for use of this spectrum in specific regions.

 Vympelcom, the largest Moscow operator at a time, initially lost money introducing GSM-1800 service, its investments into to the new GSM technology had longer-term advantages, which allowed to compete more effectively against its main rival MTS. In the second half of the 1999 Vympelcom started closing the gap with the GSM-900 operator, and by the end of the year had regained the number one position in the market.7

 In 1998, there were rumors that the Government had considered providing a GSM license to Svyazinvest (its main communication holding offered for sale) in order to increase its market value. But since the financial crisis of 1998 postponed privatization, talk about Svyazinvest’s GSM license dried out. In February 2000 Leonid Reiman, the Russian Minister of Communications announced that a new GSM license would be issued for Moscow, and there were reports that the license would be expanded to cover all territory of Russia8.

 GSM market share is expected to increase with the launch of regional GSM-1800 networks.

 2) CDMA

The CDMA (Code Division Multiple Access) standard was not adopted for mobile use in Russia for some time. It has been dedicated for fixed wireless local loop applications only. CDMA licenses were first awarded in 1997. It was uncertain whether CDMA had become de-facto a mobile standard despite of its initial limitation to the wireless local loop. The Ministry of Communications has demanded that the operators somehow "fix" the mobility of their subscribers, while the wireless carriers insisted that the subscribers should be allowed to be "mobile" if they want. As a result, Moscow CDMA operator, Sonet is openly marketing its mobile service and, therefore, competes with the city’s three other mobile operators.

 In October of 1999 CDMA carriers had a substantial legal victory. After their complaint to the State Antimonopoly Committee, the Ministry of Communications removed all limitations for CDMA operators. Meanwhile, the CDMA licenses have been issued for 80 Russian regions, including such important centers as Chelyabinsk, Rostov-on-Don, Novocherkassk, Novosibirsk, Krasnoyarsk, and St. Petersburg. Currently there are 57 CDMA operators in Russia provide services.9

 The main reason for the Russian Ministry of Communications to adopt GSM standard as a basis and to limit CDMA was its decision to follow European stream of standardization process and to sign joint roaming agreements with European carriers allowing both parties to generate revenue. The latest CDMA technology, allowing greater network capacity, was perceived to fall under US export control, therefore, reducing potential benefits . So, this factor, as well as an active Russian involvement into the European economy, will probably lead to decrease of CDMA share in the market over time10.

 In November of 2000, the Russian Ministry of Communications issued a new concept of development of the universal cellular network, covering a period until 2010. This document indicates that further development of the cellular communications in Russia has to be primarily based on the European technologies, gradual modernization of the NMT-450 networks, conversion to the all-digital networks, creation of the multimode GSM networks, expansion of the existence networks and development the third generation networks based on the European version (UMTS) of the international IMT-2002 standard11.


 From the investment point of view, telecommunications represents one of the biggest market opportunities in Eastern Europe today, and privatization of the local telecom operators has stimulated both local and Western investments into this growing industry. Before the process of new economic development in Russia has started, the telecommunications network was fully controlled by the Russian Ministry of Communications. After 1993, Russian telecom sector started a rapid development primarily on an ad hoc basis. The market was liberalized and the Government issued licenses to private operators for all types of service, including local voice telephony. Some new operators even received their own phone codes within Russia, allowing them to bypass state-controlled toll exchanges12.

 The new developing market economy, development challenges, the privatization and restructuring process, an inflow of foreign investors - these elements created a need of a new legislation base. A lot of new statutes have been approved at the beginning of 1990s for the purpose of authorization of the ownership transfer from the state monopolies to the new organized business entities.

 On December 21, 2000, the Government adopted a new Concept of Telecommunications Services Market Development of the Russian Federation ("Concept") with a purpose of creation of a new legal base in the improved telecommunications market. However, a full adoption of the Concept could complicate business and strategies of the potential and existing investors by introducing new requirements and imposing limits on foreign ownership for the regional and national operators. For example, currently the majority of some Russian carriers are owned by foreign investors directly or via the controlled holdings. Moreover, foreign capital in the St. Petersburg operator PeterStar constitutes 71%, and in St. Petersburg Telecominvest - 85%, while Global One and Sonera Russ companies fully belong to the foreign capital.13

 The Concept also gives a definition for the communications service providers, performing their actives in the Russian Federation . They are defined as "traditional" (or incumbent) and the "new" carriers. The main difference is that "traditional" operators were formed as a result of privatization and reorganization of the old state-owned communication enterprises. The new operators are defined as individual entrepreneurs and/or legal entities, licensed to provide communication services after 1990.

 The Concept defines the main goals of the telecommunications market development to year 2010 as the following:

  • Improvement of the state regulatory mechanism;
  • Creation of comfortable conditions for an efficient activity of all service providers;
  • Further development of the competition in the market;
  • Attracting new investment into the telecommunications industry.

The Concept also indicates a large current disproportion in the Russian telecommunications services market: where 87% of the "traditional" service providers bring only 49% of the revenue; while 13% of the "new" service providers enjoying 51% of the market share. A capitalization of all the incumbent carriers is only $2.00 B, while only three "new" service providers ( "Mobile Telesystem", "Vympelcom", and "Golden Telecom Corporation") together own $2.9B of a capital.

 From 1992, more than 7,400 service providers’ licenses were issued in Russia. However, the total number Russian small towns, what still do not have any telephony service is 54.000. There is also a big gap between the main centers like Moscow and St. Petersburg, where a majority of the service providers are located and many regional and local territories still poorly covered by the service.

 In most of the developed countries’ service providers currently cover 40-60% of the whole territory with a basic wireline telephony service and mobile service typically cover 25-40%, and Internet service cover 20-30%. The Concept defines several types of telecommunications markets: mobile service, local telephony, long distance and international toll services, and Internet Providers services. It is stated, that 127 of private join ventures have been created during the process of privatization.14

 The Concept defines several types of telecommunications markets: mobile service, local telephony, long distance and international toll services, and Internet Providers services. It is stated, that 127 of private join ventures have been created during the process of privatization.

 Mobile Service.

The Concept defines mobile service as a most dynamic type of services in the telecommunications market with the highest competition. The projected total coverage is 2.9 million subscribers, which is only 2% of the customer base. The annual growth is expected to be no less than 40%. The main driving forces would be a further price competition further market expansion. The sector is predicted to be the most successful.

 Local Telephony

The service is currently provided by 92 incumbent and near 2700 "new" carriers. Wireless technology currently covers 15% of the territory. In highly developed regions (such as Moscow and St. Petersburg) the coverage is better than 50%.15

 Most of incumbents could be characterized as natural monopoly entities (defined further), even though they are not the largest service providers and typically have only 100K – 300K subscribers. Only three regional companies currently have more than one million of telephone lines: Moscow City Telephone System (MGTS), St. Petersburg Telephone System and Electrosvyaz’ in Moscow Area. All together they cover only about 22% of total Russian subscribers. The Concept calls for a more active expansion of the local telephone networks.16

Long Distance and International Toll Service

Currently there is a state monopoly for this type of service and Rostelecom (the only national service provider) currently covers 70% of all long distance and international traffic. Meanwhile, there are number of smaller service providers working in different niches of the same market (hotels, satellite communications, remote locations, large business customers). So in future a real competition could develop supposedly allowing further tariff reduction.

 Internet Access Service

There are currently 2.5 million Internet users in Russia with an annual growth of 50%. This segment is expected to be very active and expanding in future as well.17

 Competition and Natural Monopoly

The Concept indicates that the Constitution of the Russian Federation guarantees a support for a free market competition. In order to ensure a fair competition, current legislation should be amended to limit at monopoly activities corresponding practical experience has to be established and adopted. Russian legislation still sees the communications and information distribution industries as closely related to "natural monopolies". Article 3 of the Federal Statute "On Natural Monopolies" determines a "natural monopoly" as a situation in the market, when a market demand could be satisfied more efficiently in the absence of a competition because of technological peculiarities of the industry itself (for example when the produced goods or services provided by the natural monopolies cannot be easily and cost-effectively replaced by any other goods or services).

 There are several service providers in the Russian telecommunications market today. The new and emerging communication services are changing the behavior of the "traditional" carriers. The main role here belongs to the market competition and business factors. Constant need for the technical infrastructure upgrade and migration to the new technologies leads to the constant need to reduce costs and improve profitability in providing services.

 Given their inexperience in the new market economy the "traditional" service providers de facto cannot compete against the "new" carriers, their competitors. One of the current goals in the legislative process is to create new mechanisms for the state regulation policies specifically targeting market areas where the incumbent operators have a monopoly18.

 Technical progress, significant increase in demand for the communication services and deregulation process in the telecommunications market have lead to a disappearance of the natural monopolies. The Russian telecommunications market, just like many other countries has the same situation.

 The Concept also states that while the new service providers will continue to expand, one of the main goals for them should be an establishing a cooperation with the incumbent carriers. The main goals of the state regulation of the telecommunications market are defined as following:

  1. to ensure implementation of the legislations of the Russian Federation in the area of telecommunications;
  2. to define specific standards and procedures for service and network interconnects;
  3. to coordinate service providers’ activities on based on interconnection policy;
  4. to maintain a state control in the services interconnection with a purpose to limit the unfair competition practices.19

 Tariff Policy

Until the end of 1998 tariff regulations were based on two-tier system: international communication services has been regulated by the Federal legislatures, while the local service was controlled and regulated by the regional authorities. Since 1999 all tariffs for the communication services are regulated by the Antimonopoly Committee of the Russian Federation.

 Currently in most of Russia there is flat-fee local service ranging for the residential users below $4 per line per month. This revenue only covers 77% of the operational, so the rest is compensated form the local budget. Right now, only 40% of "traditional" carriers operating in the local markets charge the same tariffs to government/non-profit organizations and commercial enterprises.20

 In all developed countries, telecommunications is one of the most attractive areas of economy for the investors, and a typical term for the investments return is 4 to 8 years. In Russia the current system of regulated tariffs makes an average return period for the infrastructure investments equal to 20 to 30 years. An increase of capital into the telecommunications industry sphere has been greatly diminished. During the last three years, less phone lines have been commissioned than in the previous equivalent periods.

Investment Project

Return on Investment period (ROI) before 1998 (years)

ROI period after 1998, (years)

Overall Domestic Phone Network



Urban Local Phone Network



Rural Local Phone Network




> 60

 Based on the above table, it is hard to determine why the term of the investment return has increased. A probable reason is a limitation in the rate policy, which was a basis for this not so exciting prognosis.

 In 2001, the Concept of Development required that the state regulation of tariffs had to set the equal maximum limited tariff for telephone network subscribers in order to create an achievable profitability for the local operators within 8-10 years. First levels of establishment and improvement of universal services system in Russia are: use of collective-use service kiosks and local telecom offices as well as multi-service payphones. Further, steps in this direction will depend on the market success of this phase.21

Private Regulation and Licensing. Authorities.

In 1995 a Federal Statute "Law On Telecommunications" gave the Ministry of Communications the right to regulate the industry. The law also confirmed the right of foreign investors to establish and own overlay networks, and to participate in the process of privatization of government-owned carriers. Since that time, the Ministry of Communications became responsible for licensing (by its special division), equipment certification, frequency allocation and some aspects of tariff setting. They also became responsible for setting long distance and international tariffs, even the local authorities in many regions are heavily involved in the process of tariff setting for the local phone services. The Anti-Monopoly Committee, officially charged with "natural monopolies" regulation in communications and transportation and by definition responsible for tariff setting, in practice does not have real powers22. Ministry of Communications is de facto enjoying its position of a stakeholder and makes key decisions regarding the telecommunications policy in Russia. Currently, there are plans for establishing an independent regulatory body, based on the Anti-Monopoly Committee, which have been in works for several years, but has not appear to produce any results yet23.

 As the Concept provisions state, only 4% of the radio spectrum is currently for offering services to the public, while other 96% are used jointly or specifically by the national defense and national security organizations. The further developments of the Governmental regulations will harmonize the use of the spectrum and optimize the services performance according to the international agreements and practices. One of the ways of doing so is to create a dedicated state radio-frequency regulation authority similar to FCC.

 One of the main licensing principles could be is a stimulation of creation of stable functioning and developing communication networks. This principle shall be equally applied to all operators. It shall support competition in the market while improving and developing the infrastructure.

Currently, the main purpose of licensing in telecommunications is a of control over compliance with technical requirements for all service providers, including the emerging carriers. The present licensing mechanism does not facilitate development of the local markets impacts economics of the service providers. One of the side effects of the existing system is a strong competition for the "money makers" such as long distance and international service with a very small or no competition at the local telephony market24. In general, this problem exists everywhere. To be successful in the local markets, a lot of money has to be invested into the infrastructure, so only big telecommunication companies are capable of doing so. Given the current price sensitivity of general population in Russia outside of the main centers, this market will see a little competition in many years. The proper changes and amendments to the current licensing process will help to develop the competition and address the requirement of upgrading the aged infrastructure.

 Article 18 of the draft Statute "Law On Communications" establishes a new system of licensing. Current legislation indicates the mandatory provisions for licensing of communications activity. These requirements in some cases hamper development of the service providers because while starting the new kinds of activities they have to obtain the new licenses every time. Therefore, the new regulatory draft provides only three major compliance criteria for obtaining the license:

 1) use of limited resources of the radio spectrum;

2) use of limited resources in numbering capacity;

3) provision a capability of offering universal communication services.25

 First, two requirements reflect a need of a state control over scarce resources (such as allocation of radio spectrum and numbering) and the last item (universal communications service – a service provided to any user regardless of his residence or place of employment relating to rates) protects the interests of the customers to guaranty the access to the latest technologies and services. Other legal requirements related to the licensing are established in Article 35 of the Statute.

 Thus, other kinds of licensed activities, aimed at commercial services, shall be carried out by operators after their state registration by state authorities pursuant to this Federal Statute. The indicated mechanism precisely establishes the basis of Governmental regulation and state control over communications service operators. The process of state registration is more simple than the licensing process. The new operator can start his activity more rapidly. Therefore, the operator can gain revenue more quickly. Even the Russian Government establishes two separate types of control over the communications service activities (licensing and registration), but it can be more reasonable to create the only one authorized body which will provides both types of the control at the same time.26

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